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However, that hasn’t stopped western corporates from adopting Islamic debt structures in a bid to raise much needed financing from alternative non-Western sources.

On November 19, General Electric became the first US corporate to issue an al-ijara Islamic bond — the $500m sukuk being marketed to investors in the Middle East, Asia and Europe. The industrial conglomerate reportedly saw strong demand for the issue, with orders coming in at under $1bn, according to bankers familiar with the deal.

Dubai World, the state-owned holding company in talks to restructure $26 billion of debt, hired Moelis & Co. as one of its advisers, replacing Deutsche Bank AG.

Investment bank NM Rothschild & Sons Ltd. will continue to work on the debt talks alongside Moelis, the advisory firm started by former UBS AG investment banking President Kenneth Moelis, state-owned Dubai World said in a statement today.

The Dubai-based company, led by Sultan Bin Sulayem, said today it’s in “constructive” talks with banks about the debt. The government’s Financial Support Fund is leading the restructuring of Dubai World and last week named Aidan Birkett, a partner at Deloitte LLP, as chief restructuring officer. Dubai picked Rothschild to help set up the $20 billion pool in April.

The financial-market turmoil triggered by the announcement that Dubai World may delay payments on $59 billion of debt is a reminder of how fragile the economic recovery is, said Angel Gurria, secretary general of the Organization for Economic Cooperation and Development.

The Dubai Financial Market General Index dropped 7.3 percent in its first day of trading after the government made the announcement last week, which sent European markets tumbling.

“Dubai is a reminder of how enormously fragile the recovery still is -- that we haven’t seen the end of the era of toxic assets -- that we haven’t finished the process of recapitalization of banks and that that banks still aren’t lending again in a normal way, and until they do, we won’t have a full recovery from the crisis,” Gurria said in an interview at a meeting of Latin American leaders in Estoril, Portugal.

Stocks in the Gulf region tumbled for a second straight session Tuesday as anxiety over Dubai's debt crisis spread to Qatar and Kuwait.

In a public statement, Dubai's ruler stressed federal unity across the U.A.E. amid concern that oil-rich Abu Dhabi will remain on the sidelines as it struggles to restructure the debts of its government-owned companies.

The comments did little to soothe investor nerves. "The Dubai situation has in a way given traders a perfect way to highlight just how fragile market confidence is at the moment," said Ian Griffiths, a dealer at CMC Markets.

The Dubai Financial Market's main index closed down 5.6% Tuesday after falling 7.3% the previous day. A total of $5 billion has now been wiped off the value of the bourse over the past two sessions.

Abu Dhabi stocks closed down 3.6%, while shares in Qatar and Kuwait were also hit, with benchmark measures down 8.3% and 2.7% respectively.

The ruler of Dubai on Tuesday sought to deflect criticism of his economic policies by saying that international markets had misread an announcement by a state-owned company, in his first public comments since the debt crisis erupted last week.

“They do not understand anything,” Sheikh Mohammed bin Rashid Al Maktoum said of international investors on Tuesday as he replied to questions on the fallout of Dubai World’s request for a standstill on its debts.

In a statement published on the state news agency website, Sheikh Khalifa said the UAE was strong enough to negotiate “the current difficult circumstances of the international economy” and that most sectors of the UAE economy had begun to show growth in the fourth quarter of the year.

The comments from the emirates’ rulers appeared to reassure local markets. In afternoon trade, the Abu Dhabi index was down 4 per cent but had pared earlier losses, while Dubai was down 5.6 per cent. Qatar, which opened for the first time since the end of the Eid al-Adha holiday, was down 8.3 per cent but Cairo, which on Monday fell by almost 8 per cent, rose 2.5 per cent. Amman was down 2.2 per cent.

The price of insuring against a default by Dubai fell on Tuesday as investor fears eased. The emirate’s five-year credit default swap was priced 44 basis points lower at 526 basis points, according to CMA Datavision.

But Moody’s, the ratings agency, on Tuesday estimated that the Dubai government and its related entities had debt of $100bn – more than 100 per cent of gross domestic product and higher than the market estimate of about $80bn.

Dubai World, one of Dubai’s flagship companies, said late on Monday night it had began “constructive” talks with banks to restructure $26bn of debt, including liabilities owed by its property companies Nakheel and Limitless. Nakheel has asked for all three of its sukuk, worth $5.25bn, to be suspended from trade.

In its first statement since the crisis began, Dubai World said other companies such as DP World, Jebel Ali Free Zone and Istithmar would not be included in the restructuring because they were financially stable.

The company said it had appointed Moelis & Company as an adviser along with Rothschilds.

Dubai’s government will not guarantee the debts of Dubai World, the state-owned holding company struggling under the weight of $59bn (£36bn) in liabilities, arguing that lenders were mistaken to think that there was sovereign backing.

Abdulrahman al-Saleh, department of finance chief, said that creditors were responsible for their own lending decisions and should differentiate between companies and the state.

“Creditors need to take part of the responsibility for their decision to lend to the companies. They think Dubai World is part of the government, which is not correct,” Mr Saleh said.

In Dubai’s buttoned down society, criticism of those in power is taboo. But the impact of the emirate’s debt crisis, piled on top of the recession’s effects, is fostering a loosening of that proscription.

Anger has been directed at the top lieutenants of Sheikh Mohammed bin Rashid al-Maktoum, the ruler, especially Sultan bin Sulayem, chairman of Dubai World. Mr Sulayem’s denials of financial problems over the past year are seen as leading to a last-minute call for a standstill deal with creditors, prompting a deluge of negative media coverage around the world.

“Never has so much damage been done to so many people by so few,” remarked one local on a social media site, twisting Winston Churchill’s famous quote.

I followed in horror last week as the international media continuously featured Dubai in their headlines on television and online. It was not good news. Markets from Mexico and Brazil, Germany and the UK as well as Australia have all been affected by the announcement that Nakheel, the property arm of Dubai World, is seeking to defer repayment of a $3.5bn (€2.3bn, £2.1bn) bond due in December. The impact of the financial crisis on Dubai has been felt around the world at the highest levels.

It is already clear that Dubai’s future is not what it used to be. But that does not necessarily mean it is facing a bad future. Last Wednesday’s convulsion marked a significant milestone in the financial history of the emirate, and a very different Dubai will now take shape. To overcome the present situation, hard decisions must be made. But the good news is that no other city in the Middle East today even comes close to Dubai in terms of infrastructure and logistics.

Dubai World’s request for a debt “standstill” should not be seen as a shock. In fact it is surprising that it took so long for it to happen. The government-owned conglomerate did wonders by expanding its port operations across the globe, eventually turning it into the fourth largest operator in a world where 90 per cent of trade is conducted via cargo shipping. But mistakes were also made.

Dubai World said it began “constructive” talks with banks to restructure $26 billion of debt, including liabilities owed by units Nakheel World and Limitless World.

Debt from subsidiaries such as Infinity World Holding, Istithmar World and Ports & Free Zone World will be excluded from the negotiations because those companies “are on a stable financial footing,” Dubai World, one of the emirate’s three main state-related holding companies, said in a statement.

The company is seeking to delay payments on less than half its $59 billion of obligations, damping concern that a potential default may set back the global financial system’s recovery from the credit crisis. Stocks erased losses in the U.S. after the Dubai World statement, sending the Standard & Poor’s 500 Index up 0.4 percent.

Dubai's stock market closed at a one-year low and Abu Dhabi's market closed at a record low Monday on the back of speculation that Dubai may be facing a debt crisis. Richard Urwin from BlackRock, Willem Buiter from London School of Economic and Political Science, and Arnab Das from Roubini Global Economics discuss the situation in Dubai.

The United Arab Emirates' central bank governor said on Monday there was no cause for concern about local banks, which he said had proven themselves able to weather the global crisis, the state news agency WAM reported.

"Sultan Nasser al-Suweidi said .. he did not see any reason for concern because UAE banks have increased their capitals ... (and) as commercial banks have proven their ability to face the consequences of the world financial crisis," WAM reported.

The Dubai government disclaimed responsibility for the debts of its Dubai World conglomerate on Monday, crushing earlier assumptions by creditors that the Gulf emirate would guarantee its liabilities.

Despite reports in the media suggesting that Qatar might not be substantially affected by the unfolding crisis in Dubai, some Qatari banks and corporate entities do have exposure to Dubai, in particular, and the UAE as a whole.

The country’s largest lender, Qatar National Bank (QNB) acquired 23.8 percent stake in UAE-based Commercial Bank International for QR1.1bn.

In February that year (2008), the Commercial Bank of Qatar (Commercialbank) announced that it concluded a strategic alliance with United Arab Bank (UAB), having bought a fair stake in the UAB. It now holds 40 percent stake in the bank.

A few weeks back you may remember that I talked about the Stratton Street ECG Wealthy Nations bond fund which I believed warranted further attention. This invested in a wide range of sovereign and corporate debt issued by countries regarded as ’wealthy’ under Stratton Street’s screening methodology - and those countries included Middle Eastern hot shots such as Qatar, Abu Dhabi, UAE and of course, Dubai.

Now you won’t need me to remind you of the events of the last few days, but you might be interested in the views of the fund managers from Thursday evening.

I think the crucial paragraph is the last one. Increasingly I’m tending to bold contrarian positions especially when a flight from risk ends up devaluing assets in related peer groups not suffering quite the same structural problems. Dubai may or may not be in deep, deep trouble but the sudden collapse in prices for say Qatar debt I think may present a compelling opportunity. Read on.

Dubai's troubles offer a warning of the perils of investing in places where leaders--whether of governments or companies--have limited accountability.

In fact, it raises questions about other investment destinations: China, for example.

One reason why markets continue to be jittery over last week's news of a standstill on property conglomerate Dubai World's debt is the lack of transparency surrounding it. That's a direct function of a closed political system that is not conducive to foreign investment.

The flashy, spendthrift needs his prim, conservative neighbor to bail him out.

Such is the situation between debt-ridden Dubai and flush Abu Dhabi, two Persian Gulf emirates with starkly different financial strategies and temperaments that may grudgingly need each other to prevent long-term investor panic from spreading beyond the United Arab Emirates.

Dubai's $80-billion debt, nearly $60 billion of it held by the investment conglomerate Dubai World, is testament to the emirate's overextended reliance on a real estate market whose fortunes tumbled in the global downturn. Unlike much of the region, Dubai was not blessed with vast oil reserves and needs deep pockets to prevent two of its main corporations -- and its reputation -- from collapsing.

Dubai World borrowed billions of dollars to acquire some of the most high-profile commercial developments in the United States in recent years, and it could be forced to sell them at a loss if the Persian Gulf conglomerate can't restructure its debts.

Dubai World said last week it would seek a six-month delay in paying creditors on nearly $60 billion it owes. The desert emirate racked up the debt during its own real estate bubble that popped with the global recession.

Among Dubai World's U.S. assets are several luxury hotels — a sector that has been one of the hardest hit by the fallout from rising unemployment and plunging real estate values this year.

It is 32 years since Sheikh Mohammed's colours were first carried to victory on a racecourse, and the precise amount of money he has since poured into racing around the world is beyond accurate calculation. And for almost as long as the sheikh and his brothers have been a dominant force in international bloodstock, there have been voices warning of the disaster that might follow if, or when, their money or enthusiasm ever ran out.

Now, it seems, we might be about to find out. Dubai World, the state-backed business behind much of the emirate's building boom, is drowning in debt. The neighbouring emirate of Abu Dhabi, which is in the much happier position of drowning in oil, may offer Dubai's best chance of rescue, but may also feel it is a bit cheeky to run the world's largest bloodstock empire with one hand while holding out a begging bowl with the other.

John Ferguson, one of Sheikh Mohammed's closest bloodstock advisers, stressed last week that the Sheikh's personal wealth is separate from that of Dubai itself, and that it is business as usual for Godolphin, Darley and all the many other racing and breeding businesses that have their roots in Dubai.

It must be fun to spark a world financial panic and then go on a five-day vacation. By now everyone knows that on Wednesday of last week, right before the Muslim world shut down for the Eid-al-Adha festival, Dubai World, the flagship investment company owned by the Government of Dubai and/or Dubai’s ruler Sheikh Mohammed bin Rashid al-Makhtoum, announced a standstill on its debt repayments, with specific reference to a $4 billion bond payment that Nakheel, a Dubai World property development subsidiary, is due to pay in December. The world has now, finally, woken up to realize that the Dubai miracle is built on sand, both literally and figuratively.

I hate to say I told you so (why do people always say that? I’m usually delighted to say I told you so), but in a blog post that appeared on this site last July “Can Dubai Come Back?” I advised investors to steer clear of Dubai, pointing out that “rampant intermingling of public and private funds and little transparency over who owns and owes what,” it was hard to know exactly what is going on inside any company. By all indications Nakheel and also Emaar, another state-owned property developer, were perilously close to insolvency if they hadn’t already crossed the line. Nakheel had shelved development of the second and third Palm Island projects and Emaar, developer of the world’s tallest building Burj Dubai, was trying to get itself acquired by Dubai Holdings. Arguments about whether or not all these companies were then or are now insolvent are pretty much beside the point. I likened the Dubai property and investment markets to a game of three-card monte, where losses and liabilities could be moved about and hidden from view. Given the interlocking nature of UAE companies, when you buy a share of one it’s hard to know who else’s hidden risks and liabilities you’re buying too.

Today, the first day of trading in the UAE since last Wednesday’s market close, the Dubai Stock Exchange closed down 7 per cent and Abu Dhabi’s 8 per cent. DP World, a profitable Dubai World ports operating subsidiary, saw its price drop 15 per cent. Some analysts now predict that the Dubai property market, already down around 50% from its peak, could drop a further 40% for a total 70% peak-to-trough decline.

Dubai's debt crisis could help push Barneys New York back into American hands by early next year -- specifically, the clutches of New York hedge-fund tycoon Richard Perry and Los Angeles billionaire Ronald Burkle.

Istithmar, part of the Dubai government's investment arm that is looking to delay payments on tens of billions of dollars in debt, shelled out $942 million to buy the luxury retailer in 2007 from Jones Apparel, the New York-based owner of brands like Nine West.

Now, as Dubai's financial troubles worsen, Istithmar could be forced to give up control of Barneys to a pair of powerful US creditors. Perry quietly became Barneys' largest bondholder earlier this year, and Burkle has recently amassed a big chunk of the luxury chain's $500 million debt load.